You’re a project manager working a skyrise construction project. However, you fear project delays due to reworks and mishaps along the way. The project has a tight deadline.
One of your business associates suggests a surety bond that can provide assistance throughout the project in case a delay happens. You’re intrigued, but you don’t know what a surety bond entails.
What is a surety bond?
A surety bond is an agreement where one party guarantees the work, debt, or performance of another. It involves three parties: the surety (the institution insuring the bond), the principal (you), and the obligee (the entity that requests the bond). The surety can provide you with a line of credit or funds for business endeavors.
The cost of the bond varies on such factors as the bond type, bond amount, and risk profile of the principal. Surety bond requirements vary by state and local guidelines. This article will provide an in-depth exploration of surety bonds. Read further if you want to know if surety bonds are right for you.
What is a Commercial Surety Bond?
Overall, you’ll find two types of surety bonds: contract surety bonds and commercial surety bonds. What is a surety for commercial purposes? Commercial sureties guarantee the work or performance of the principal.
You’ll normally find these types of bonds at the state and local level. When dealing with state or federal governments, for example, you may need to obtain a surety bond to obtain licenses or permits for a particular trade.
Take note of the five types of commercial sureties:
- Court bonds
- Permit/license bonds
- Public bonds
- Fiduciary bonds
- Miscellaneous bonds
For court bonds, a defendant or plaintiff may get a court bond to protect parties on the opposite side of a court battle from fraud or financial transactions. Fiduciary bonds are also court-based bonds that compel trust administers to obtain one.
Public official bonds apply when public officials must obtain them to protect the public from corruption or mismanagement. Miscellaneous bonds fall under any category that doesn’t pertain to the aforementioned commercial bonds. Extraneous bonds may come in a variety of forms, such as title bonds or utility bonds.
What is a Contract Surety Bond?
A standard contract surety bond guarantees the terms of the contact. It can apply to any industry, most notably the construction sector. Under a construction contract, the project owner would be the obligee, and the contractor would be the principal.
The surety company would fulfill the surety role. If the contractor fails to complete the contract, the surety company can find another contractor to complete the job on behalf of the obligee. Or, the surety company would compensate the obligee monetarily.
There are four types of contract bonds:
- Performance bonds
- Bid bonds
- Warranty bonds
- Payment bonds
Performance bonds guarantee work for the obligee in case the contractor fails to fulfill an agreement. Bid bonds occur if a bidder fails to fulfill his or her obligation after winning a bid.
For payment bonds, it ensures that suppliers and subcontractors receive payment according to the bond terms. A warranty bond applies to guaranteed repairs in the event of defects or mistakes during the project.
Where Can I Get an Insurance Bond?
Before getting a surety bond, you must know which one is best for you. An institution will deny your request for a surety bond if you choose the wrong one. For information on the best bond, you can contact your local license/permit department.
State or local authorities can also inform you about the requirements in your area. Or, you can contact a surety company for the best one for you.
How Will a Security Bond Benefit Me?
A surety bond helps you complete projects on time and maintains your professional image.
Also, you will secure better relationships with customers if they know that you’re bonded and insured. And, customers and clients are more likely to do business with you on a consistent basis if they know you’re in a stable financial position. Additionally, suppliers and vendors will feel more comfortable doing business with you because of the guarantee that ensures prompt payment.
Surety bonds are especially important during construction projects, where unforeseen events arise that may stall a project. They will give you the breathing room you need in case a project lasts longer than expected. It helps ensure that suppliers and crew members receive payment in case a project delay occurs.
What Happens if I Default?
If a project delay is permanent, you will default on the surety bond. With that, default doesn’t mean that the surety company will respond with an immediate petition against you. In many cases, the company will try to work with you and resolve the situation.
Surety companies run across project shutdowns and delays incessantly. According to Surety.org, contractor failure rates can run as high as 29 percent. The good news is that surety companies can play a vital role in preventing default and overcoming project obstacles.
- Example: A surety company can provide financial assistance if a project manager runs into financial trouble. Or, the company can hire more experienced personnel who will complete the project faster.
If there is no other recourse, the surety company will respond based on the circumstances of default. In a worse scenario, the company will take over the project directly and complete it. Further, the surety company may hire a new contractor entirely.
The company will cover the full amount noted on the bond. And, there are times when a company will cover beyond the bond terms. If this occurs, the surety can request your company assets to satisfy the bond balance.
What is a Surety Bond for Non-Construction Purposes?
Outside of the construction sector, a surety bond pertains to any other commercial matter, including court cases. State and local governments may require them if you intend to get a specific license or permit. Surety bonds give your business more credibility in the eyes of customers and vendors/suppliers.
What is a surety bond when used for commercial purposes? They are mostly any situation involving business matters, ensuring that a project manager completes projects on time. Regardless of the reason, surety bonds can provide a direct line of credit or funding.
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